The bank's losses on consumer and corporate loans declined, a sign that the worst may soon be over for Citigroup, whose toxic assets forced it to seek U.S. government help three times in 2008 and 2009.

They've crept out of the abyss like everyone else, said Henry Asher, president at Northstar Group, whose clients own Citi shares.

They have a long way to go before they start reporting significant profits, Asher added.

The bank is still facing significant headwinds. When asked about the outlook for loan losses on a conference call with analysts, Chief Executive Vikram Pandit said that losses could increase in the first quarter, and after that, the economy will be a key variable.

Pandit also said that the bank sees a good outlook for foreign credit performance.

It's not an impressive quarter in my view, said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel. Investors are still worried about further credit losses ahead, as well as the impact of sweeping changes to banking regulation, McCormick said.

The third-largest U.S. bank said its quarterly loss narrowed to 33 cents a share, compared with a loss of $17.3 billion, or $3.40 a share, a year earlier.

The loss matched analysts' average estimate, according to Thomson Reuters I/B/E/S. Citigroup shares rose 10 cents to $3.52 in early afternoon trading.

New York-based Citigroup set aside $8.2 billion in the quarter to cover credit losses and other items, compared with $12.7 billion in the 2008 fourth quarter. Loan losses were $7.14 billion, up 16 percent from a year earlier but down from $7.97 billion in the third quarter.

For a graphic on Citigroup earnings, click on: http://link.reuters.com/tyt44h

Like JPMorgan Chase & Co , Citigroup's investment banking revenue in 2009 helped offset deepening consumer credit losses. But in the fourth quarter, Citigroup's securities and banking business, apart from the assets it is looking to shed, recorded a gain of $300 million because of a tax benefit.

PANDIT

Citigroup is the second major bank to report fourth-quarter results, following JPMorgan. Bank of America Corp , the largest U.S. bank, and Wells Fargo & Co are due to report on Wednesday.

Citigroup has been struggling to return to profitability in its main lending businesses after posting more than $100 billion of credit losses and writedowns since the credit crunch began in 2007.

In a sign that some asset prices are recovering, Chief Financial Officer John Gerspach told analysts the bank is transferring $61 billion in assets to Citigroup from Citi Holdings, the bad bank created to wind down troubled assets.

Part of that shift is because the bank moved some fairly high-quality assets into a pool that was guaranteed by the government against excessive loss. With that guarantee now over, the bank can move the assets back to its Citicorp unit, where it keeps assets in its main businesses.

Citigroup ended that guarantee late last year, when it also repaid the government $20 billion and sold $20.5 billion of stock and convertible bonds.

Ending the guarantee and repaying the United States should bring less government oversight in areas such as compensation, but it came at a cost.

The bank recorded a nearly $5 billion after-tax loss because repaying the bailout entailed buying back securities from the government at a lower price than their value on the bank's books. Ending the loss sharing agreement resulted in another $1.27 billion hit to earnings, after taxes.

Citi was forced to sell shares at $3.15 apiece, well below their level before the bank announced a share sale and below the $3.25 price at which the government bought its shares. The low sale price forced the government to delay selling off a portion of its stake in the bank.

The government still owns 7.7 billion Citigroup shares, worth about $26 billion at current market prices.

Citigroup shares fell more than 50 percent in 2009, while the KBW Bank index , a broader measure of banks, dropped just 3.6 percent. Citigroup shares were up 9 cents or 2.6 percent at $3.51 on the New York Stock Exchange on Tuesday afternoon.

(Reporting by Dan Wilchins; Additional reporting by Clare Baldwin and Elinor Comlay; editing by John Wallace and Matthew Lewis)